Monday, September 29, 2014

Why and how we care about inequality

Note: These are remarks I gave in a concluding panel at the Conference on Inequality in Memory of Gary Becker, Hoover Institution, September 26 2014. The conference program here, and John Taylor's summary here, where you can see the great papers I allude to. I'll probably rework this to a more general essay, so I reserve the right to recycle some points later.

Why and How We Care About Inequality

Wrapping up a wonderful conference about facts, our panel is supposed to talk about “solutions” to the “problem” of inequality.

We have before us one “solution,” the demand from the left for confiscatory income and wealth taxation, and a substantial enlargement of the control of economic activity by the State.

Note I don’t say “redistribution” though some academics dream about it. We all know there isn’t enough money, especially to address real global poverty, and the sad fact is that government checks don’t cure poverty. President Obama was refreshingly clear, calling for confiscatory taxation even if it raised no income. “Off with their heads” solves inequality, in a French-Revolution sort of way, and not by using the hair to make wigs for the poor. The agenda includes a big expansion of spending on government programs, minimum wages, “living wages,” government control of wages, especially by minutely divided groups, CEO pay regulation, unions, “regulation” of banks, central direction of all finance, and so on. The logic is inescapable. To “solve inequality,” don’t just take money from the rich. Stop people, and especially the “wrong” people, from getting rich in the first place.

In this context, I think it is a mistake to accept the premise that inequality, per se, is a “problem” needing to be “solved,” and to craft “alternative solutions.”

Just why is inequality, per se, a problem?

Suppose a sack of money blows in the room. Some of you get $100, some get $10. Are we collectively better off? If you think “inequality” is a problem, no. We should decline the gift. We should, in fact, take something from people who got nothing, to keep the lucky ones from their $100. This is a hard case to make.

One sensible response is to acknowledge that inequality, by itself, is not a problem. Inequality is a symptom of other problems. I think this is exactly the constructive tone that this conference has taken.

But there are lots of different kinds of inequality, and an enormous variety of different mechanisms at work. Lumping them all together, and attacking the symptom, “inequality,” without attacking the problems is a mistake. It’s like saying “fever is a problem. So medicine shall consist of reducing fevers.”

Yes, the reported, pre-tax income and wealth of the top 1% in the U.S. and many other countries has grown. We have an interesting debate whether this is “good” or “market” inequality – Steve Jobs starts a company that invents the iphone, takes home 1/10 of 1% of the welfare (consumer surplus) the iphone created, and lives in a nice house and flies in a private jet – or “bad,” “rent-seeking” inequality, cronyism, exploiting favors from the government. Josh Rauh made a good case for “market.” It’s interesting how we even use different language. Emmanuel Saez spoke of how much income the 1% “get,” and Josh how much the 1% “earn.”

In middle incomes, as Kevin Murphy told us, the “returns to skill” have increased. This has nothing to do with top-end cronyism. As Kevin so nicely reminds us, wages go up when demand for skill goes up and supply does not. He locates the supply restriction in awful public schools, taken over by teacher’s unions. Limits on high –skill immigration also restrict supply and drive up the skill premium. There’s a problem we know how to fix. Confiscatory taxation isn’t going to help!

More “education” is one obvious “solution.” But we need to be careful here, and not too quickly join the chorus asking that our industry be further subsidized. The returns to education chosen and worked hard for are not necessarily replicated in education subsidized or forced. Free tuition for all majors draws people into art history too. Forgiving student loans for people who go to non-profits or government work, or a large increase in wealth and income taxation, remove the market signal to study computer programming rather than art history, which raises the skill premium even more. Saudi Arabia spends a lot on “education” in Madrases around the world. In a Becker memorial conference remember three rules: Supply matters, not just demand; don’t redistribute income by distorting prices; and human capital investments respond to incentives. (By the way, I’m all for art history. Just don’t pretend that the measured economic returns to education will apply.)

America has a real problem on the lower income end, epitomized by Charles’ Murray’s “Fishtown.” A segment of America is stuck in widespread single motherhood, leading to terrible early-child experiences, awful education, substance abuse, and criminality. 70% of male black high school dropouts will end up in prison, hence essentially unemployable and poor marriage prospects. Less than half are even looking for legal work.

This is a social and economic disaster. And it has nothing to do with whether hedge fund managers fly private or commercial. It is immune to floods of Government cash, and, as Casey Mulligan reminded us, Government programs are arguably as much of the problem as the solution. So are drug laws, as much of the earlier discussion reminded us.

Around the world, about a billion people still live on $2 a day, have no electricity, drinking water, or even latrines. If you care about “inequality,” minimum wage earners in the US should be paying Piketty taxes.

These cases all represent completely different problems. Where there are problems, we should fix them, but to fix them, not to “reduce inequality.”

Kinds of inequality

More puzzling, why are critics on the left so focused on the 1% in the US, when by many measures we live in an era of great leveling?

Earnings inequality between men and women has narrowed drastically, as Kevin Murphy reminded us. Inequality across countries, and thus across people around the globe, has also been shrinking dramatically even as income inequality within advanced countries has risen. One billion Chinese were rescued from totalitarian misery, and a billion Indians sort-of-rescued from British-style license-Raj socialism. These are wonderful events for human progress as well as, incidentally, for global inequality. Sure, these countries have many political and economic problems left, but the “its’ all getting worse” story just aint’ so. China and India did not start growing by confiscatory taxation of income and wealth, and increasing state intervention in markets. Exactly the opposite. And the parts of the world left or falling behind – parts of the Middle East, Latin Amirica (think Venezuela), parts of Africa – have just nothing to do with the private-jet purchases of US hedge fund billionaires.

“Inequality” is about more than income or wealth, reported to tax authorities. Consumption is much flatter than income. Rich people mostly give away or reinvest their wealth. It’s hard to see just how this is a problem.

Political, social, cultural inequality, inequality of lifespan, of health, of social status, even of schooling are all much flatter than they used to be (Nick Eberstat recently summarized these in a nice Wall Street Journal Oped.) Mark Zuckerberg wears a hoody, not a top hat.

Look at Versailles. Nobody, not even Bill Gates, lives like Marie Antoinette. And nobody in the US lives like her peasants. In 1960, Mao Tse-Tung waved his hand and 20 millions died. In 1935, Joseph Stalin did the same. Neither reported a lot of income to tax authorities for economists to measure “inequality.” It is preposterous to claim that, even the citizens of Ferguson Mo., with all their problems and injustices, are less equal now than they were in 1950. Or 1850.

Why does it matter at all to a vegetable picker in Fresno, or an unemployed teenager on the south side of Chicago, whether 10 or 100 hedge fund managers in Greenwich have private jets? How do they even know how many hedge fund managers fly private? They have hard lives, and a lot of problems. But just what problem does top 1% inequality really represent to them?

I’ve been reading Piketty, Saez, Krugman, Stiglitz, the New York Times editorial pages to find the answers. They all recognize that inequality per se is not a persuasive problem, so they must convince us that inequality causes some other social or economic ill.

Here’s one. Standard and Poors economists wrote a recent summary report on inequality, (earlier post here) perhaps as penance for downgrading the US debt, and wrote

As income inequality increased before the crisis, less affluent households took on more and more debt to keep up--or, in this case, catch up--with the Joneses....

In Vanity Fair, Joe Stiglitz wrote similarly that inequality is a problem because it causes

a well-documented lifestyle effect—people outside the top 1 percent increasingly live beyond their means….trickle-down behaviorism

Aha! Our vegetable picker in Fresno hears that the number of hedge fund managers in Greenwich with private jets has doubled. So, he goes out and buys a pickup truck he can’t afford. Therefore, Stiglitz is telling us, we must quash inequality with confiscatory wealth taxation… in order to encourage thrift in the lower classes?

If this argument held any water, wouldn’t banning “Keeping up with the Kardashians” be far more effective? (Or, better, rap music videos!) If the problem is truly overspending by low income Americans, can we not think of more directed solutions? For example, might we not want to remove the enormous taxation of savings that they face through social programs?

Another example. The S&P report moved on to a new story: Inequality is a problem because rich people save too much of their money, and poor people don’t. So, by transferring money from rich to poor, we can increase overall consumption and escape “secular stagnation.”

I see. Now the problem is too much saving, not too much consumption. We need to forcibly transfer wealth from the rich to the poor in order to overcome our deep problem of national thriftiness.

I may be bludgeoning the obvious, but let’s point out just a few ways this is incoherent. If Keynesian “spending” and “aggregate demand” are the problems behind low long-run growth rates – and that’s a big if - standard Keynesian answers are a lot easier solutions than confiscatory wealth taxation and redistribution. Which is why standard Keynesians argued for monetary and fiscal policies, not confiscatory anti-inequality taxation, until the latter became politically popular.

In a series of recent blog posts, (see coverage here) Paul Krugman offers evidence that people vastly underestimate how wealthy the rich are, bemoans how they live separate lives -- my fry cook has, in fact, no idea of their lifestyle -- and argues for confiscatory taxation to eliminate the "externality" of their excessive consumption. Well, I'm glad logical consistency isn't holding back these arguments.

The most common argument is that we have to reduce income inequality to avoid political instability. If we don’t redistribute the wealth, the poor will rise up and take it. As a cause-and effect claim about human affairs, this is dubious amateur political science, one that would look especially amateurish to the political scientists and historians at this Hoover Institution on War, Revolution and Peace. Maybe the poor should rise up and overthrow the rich, but they never have. Inequality was pretty bad on Thomas Jefferson’s farm. But he started a revolution, not his slaves.

These are just three examples, and I won’t go on since time is short. But there are some interesting patterns. The answer is always the same – confiscatory wealth taxation and expansion of the state. The question, the “problem” this answer is supposed to solve keeps changing. When an actual economic problem is adduced – excessive spending by the poor, inadequate spending by the rich, political instability -- they don’t advocate the problem’s natural solution. These “problems” are being thought up afterwards to justify the desired answer. And amazing, novel and undocumented cause-and-effect assertions about public policy are dreamed up and passed around like internet cat videos.

Politics and Money

But these are serious people. Let’s recognize this is all the balderdash and distraction that it seems, and that we are circling around the elephant in the room. Let’s try to find the core issue that they are really talking about. Let’s find a common ground, a resolvable difference, so we can stop talking past each other.

In the end, most of these authors are pretty clear the real problem they see: money and politics. They worry that too much money is corrupting politics, and they want to take away the money to purify the politics.

That explains the obsessive focus on the income and wealth of the top 1%. Consumption may be flatter, but income and wealth buy political connections. And all of our concern about the status of the poor, the returns to skill, awful education, the effects of widespread incarceration, all this is irrelevant to the money and politics nexus.

Now, the critique of an increasingly rent-seeking society echoes from both the left and the libertarians. Rent-seeking is a big problem. Cronyism is a big problem. Stigler finds a lot to agree with in Stiglitz. As do Friedman, Buchanan, and so forth.

But now comes the most astounding lack of logic of all. If the central problem is rent-seeking, abuse of the power of the state, to deliver economic goods to the wealthy and politically powerful, how in the world is more government the answer?

If we increase the statutory maximum Federal income tax rate 70% , on top of state and local taxes, estate taxes, payroll taxes, corporate taxes, sales taxes and on and on -- at a Becker conference, always add up all the taxes, not just the one you want to raise and pretend the others are zero -– will that not simply dramatically increase the demand for tax lawyers, lobbyists and loopholes?

If you believe cronyism is the problem, why is the first item on your agenda not to repeal the Dodd Frank act and Obamacare, surely two of the biggest invitations to cronyism of our lifetimes? And move on to the rotten energy section of the corporate tax code.

They don’t, and here I think lies the important and resolvable difference. Stiglitz wrote that “wealth is a main determinant of power.” Stigler might answer, no, power is a main determinant of wealth. To Stiglitz, if the state grabs all the wealth, even if that wealth is fairly won, then the state can ignore rent-seeking and benevolently exercise its power on behalf of the common man. Stigler would say that government power inevitably invites rent-seeking. His solution to cronyism is to limit the government’s ability to hand out goodies in the first place. We want a simple, transparent, fair, flat and low tax system.

Here is where I think Josh Rauh’s masterful collection of data that the upper 1% in the U.S. are making their money fairly, falls flat to left ears. They think even fairly gotten money will pervert politics.

Now we have boiled the argument down to a simple question of cause and effect. They believe that raising tax rates and a large increase in state direction of economic activity will reduce rent-seeking and cronyism. I assert the opposite, which is the rather traditional conclusion of the vast literature on public choice as well as obvious experience. If I were trying to be polite, I might say it’s an interesting new theory to be debated and investigated. But I’m not, and it isn’t. It is the cream on the cake of amateur ad-hoc assertions of cause-and-effect relationships in human affairs, changing the sign of everything we know.

As we look around the world, cronyism, rent-seeking, using the power of the state to deliver riches to yourself and privilege to your family is a huge problem, not just driving inequality, but driving most of poverty, lack of growth, and human misery throughout the world. But Egypt, say, does not suffer because it is not good enough at grabbing wealth, stifling markets and blocking the rise of entrepreneurs. Quite the opposite.

Politics and the agenda.

But let’s go with their argument. At least now the argument makes sense, in a way hat limiting envy-induced spendthrifery does not. But looked at in the light of day, the argument is truly scary. They are saying that the government must confiscate individual wealth so that individual wealth cannot influence politics in directions they don’t like. Koch brothers, no. Public employee unions, yes.

We finally agree on a cause-and-effect proposition. Yes, expanding the power of the state to direct economic activity and strip people of wealth is well-proven way to cement the power of the state and quash dissent.

So now you see why I rebel at the presumption that “inequality” is a problem, and why I rebel at the task of articulating an alternative “solution.” “Inequality” has become a meaningless buzzword, or code word for “on our team,” like “sustainability,” or “social justice.” Should we discuss “free-market solutions” to address “social justice?”

“Inequality” has become a code word for endless, thoughtless, and counterproductive intrusions into economic activity. Minimum wages, stronger teachers unions, even prison guard unions, are all advocated on the grounds of “providing middle class jobs” to “reduce inequality,” though they do the opposite. Mayor Bill de Blasio has already reduced it to farce: As reported in the New York times, the latest energy efficiency standards for fancy New York high rises are bing put in place. Why? To cool the planet by a billionth of a degree? To stem the rise of the oceans by a nanometer? No, first on the list… to reduce inequality. Poor people pay more of their incomes in heating bills, you see.

Finally, why is “inequality” so strongly on the political agenda right now? Here I am not referring to academics. Kevin has been studying the skill premium for 30 years. Emmanuel likewise has devoted his career to important measurement questions, and will do so whether or not the New York Times editorial page cheers. All of economics has been studying various poverty traps for a generation, as represented well by the other authors at this conference. Why is there a big political debate just now? Why is the Administration and its allies in the punditry, such as Paul Krugman and Joe Stiglitz, all a-twitter about “inequality?” Why are otherwise generally sensible institutions like the IMF, the S&P, and even the IPCC jumping on the “inequality” bandwagon?

That answer seems pretty clear. Because they don’t want to talk about Obamacare, Dodd-Frank, bailouts, debt, the stimulus, the rotten cronyism of energy policy, denial of education to poor and minorities, the abject failure of their policies to help poor and middle class people, and especially sclerotic growth. Restarting a centuries-old fight about “inequality” and “tax the rich,” class envy resurrected from a Huey Long speech in the 1930s, is like throwing a puppy into a third grade math class that isn’t going well. You know you will make it to the bell.

That observation, together with the obvious incoherence of ideas the political inequality writers bring us leads me to a happy thought that this too will pass, and once a new set of talking points emerges we can go on to something else.

But if that is our circumstance, clearly we should not fall for the trap. Don’t surrender the agenda. State our own agenda. We care about prosperity. We care about fixing the real, serious, economic problems our country faces and especially that people on the bottom of society face. Globally, we care about the billion on $2 a day, that no amount of tax and transfer will help.

The “solutions,” the secrets of prosperity, are simple and old-fashioned: property rights, rule of law, honest government, economic and political freedom. A decent government, yes, providing decent roads, schools, and laws necessary for the common good. Confiscatory taxation and extensive government direction of economic activity are simply not on the list.

95 comments:

A very thought-provoking article, though I don't understand what you mean when you write India was rescued from British Socialism; did you mean they had a lucky escape from the post war Labour government? My feeling is that the well-intentioned but fatally idealistic legacy of Mr Ghandi was used stifle the idea of free markets for years to come. But then I also think of the Revolutionary War as the (first) American civil war, and as the British Revolution which unfortunately didn't come home...

"though I don't understand what you mean when you write India was rescued from British Socialism"

Dear, dear John, you really need to take some history lessons! The golden age of capitalism was the British Empire before the Great Depression.This was the age of the Gold Standard and Charles Dickens. Companies and markets were sacrosanct. India was the jewel in the crown of this Empire.

Sounds like Stiglitz is channeling "The Theory of the Leisure Class". I don't think it's mimicry though. I think as purchasing power eroded people made up the difference with debt. People don't buy the price any more. They buy the payment.

I agree with your solutions but question whether they are attainable without upheaval.

"People of privilege will always risk their complete destruction rather than surrender any material part of their advantage."

Imagine if patents didn't expire - ever. A company that invents a good has sole propriety over that invention for all time. Would that be conducive to higher or lower real growth? I would venture that lower real growth would be the result.

But when people are selfish, how can we expect them to behave ethically. Even in democracy the people who can make laws, if something effects their selfish interest why would them do it. Eg. corruption is one of most important factor for inequality, but why would politicians will make strong laws when they themselves involved in corruption. If someone is beneficiary of manipulation of a rule, he has no (selfish) interest to make rule which can't be manipulated. Simple point is when people can(means have power to) manipulate the system and if it gives them selfish benefit, they will do it (what else would you expect from a species which is genetically selfish). So if solution is not the ones like honest govt, ethical population etc its what a solution to lead to. The real solution is how to achieve it, what laws or mechanism should be put in place so that even selfish people finds it in their selfish interest to behave honestly.

This is a great article but I can't believe John makes his argument without discussing the incentives that inequality allows. We have progressed out of the caves because of innovation. Innovation happens much faster if the innovators are allowed to keep most of the fruits of their innovation. We have smart phones, a polio vaccine, electricity, and a decoded human genome because there are incentives for innovators in the United State. And for every innovator there are many would be innovators who work very hard and fail, so incentives are important. So it seems like John is making his very good argument with one hand behind his back.

Actually, innovation is the fastest when researchers and innovators can access the work of other researchers and innovators, so you need good balance between the rights of the innovator and the rights of the society. Current patent practice, especially in IT sector, more and more goes towards monopoly, and monopoly is very bad for the innovation. Basic human nature: if someone has made an important innovation and is allowed monopoly because of that, he will use his position to stifle any research that could threaten his position.

Doesn't that apply to all innovation i.e. the road transport system and combustion engine, current form of government, ideals of capitalism and democracy. Institutions and other forms of innovation exist only because they are able to protect themselves - even in the cases of better ideas.

I lived a meaningful part of my adult life in the socialistic country. There were plenty of innovative people willing to offer their ideas even if not being able “to keep most of the fruits of their innovation.” There was lack of capital and their inventions disturbed the blissful marasmus of the government bureaucracy.

What's your thinking on specific plans to aid poor children via education and health? Given thr social concerns that you mention, do you have any high level thoughts on the what the system looks like in practice, who pays for it, etc? How do we get to better outcomes? - AC

This article is a jejune piece of polemics replete with gross exaggerations and unsupported allegations. I got nothing out of it. That stands in great contrast to the great writings of Friedman, Stigler, Buchanan, Becker and others in the Public Choice area who intelligently discuss the redistributive aspects of public policy and give insight to the incentives and interests of different groups. Prof. Cochrane, please go back to discussing financial and macro models where you have shown good insights. Public choice is not your comparative advantage.

Eddie (The Eddie Allen, right?) Thanks for honest feedback. I'll be curious to see if other commenters feel this way. I do debate whether to keep the blog to fairly narrow macro and monetary economics issues or larger policy issues, and I do listen to feedback. John

Thanks Professor Cochrane for being open to other views. I find a lot of the "purists" in economics - who want to keep the discipline based on rational choice and restricted to mathematical reasoning are actually not some of the best around. I have noticed in the past you have actually been very open and supportive to people who use other methodology (eg historical), and this support is very important if we are really going to find solutions.

Yes, I feel similarly. In places, you sound like a shrill hack not like a scientist I remember from my Advanced Investments class.

For example, do you really believe that inequality is on the agenda now because people don't want to talk about Obamacare, not because we've had no growth in median incomes but huge growth in top incomes over the last 30 years?

Do comment on these issues, but do it with charts, evidence, correlations not with slogans. Please. If we wanted right wing slogans, we could get them off the internet elsewhere.

I completely, totally, 100% disagree with Eddie Allen. Eddie has no clue.Professor - keep your comments coming on major policy issues; teach us how to think about such issues from an Econ perspective; teach us to see the trade-offs, the incentives issues, the opportunity costs, the rules vs discretion debates, etc etc, that you so magisterially do.

Yes, of course, do macro, finance, asset pricing, etc. It is interesting as well. But do not shy away from policy issues, or popular Econ issues, just because people like Eddie whine about not liking your "public choice approach".

I like this blog because it is grounded on sound Econ - the Econ of trade-offs, opportunity costs, no-free-lunches, incentives, etc. These things must be hammered over and over again, *especially* in the big policy debates.

The great Arnold Harberger gave a speech at the Catholic University of Chile once ("The Economist & The Real World" was the title), where among several things, he emphasized - if the economist does not do it, who will? The Poli Sci guy? no; the lawyers? no; the accountants? no. Only the Economics profession has the train of thought, the mindset and the tools of hammering trade-offs, welfare losses, incentives, opportunity costs.

So - no Professor; do not give up, because many of us really learn from what you have to say. And leave Eddie in the dust.

Agree with the previous comment. Most economists bend over backwards to avoid seeming reactionary, or unsympathetic, or out-of-touch, or out-of-style. It's also politically much more rewarding to advocate this or that activist policy. How many politicians seek the counsel of economists arguing for simple policies such as protecting private property, bolstering rule of law and an impartial judiciary, and low and simple taxes? A few, but it's a poor mix of policy positions for an economist hoping for a stint in government, or a government grant, or invitations to Davos, or UN, or World Bank, or IMF conferences. In short, it's relatively rare for first-rate economists to articulate the important truths that Cochrane does in this piece. Please keep it up.

I think history is quite clear that expansions in the social safety net occur after periods when inequality rises. Bismarck invented the welfare state in the 1800s as a response to the rise of Socialism occasioned by the social disruption of industrialization. Roosevelt brought social insurance to America in the wake of the Great Depression; this was a far better outcome that what might have occurred under a Huey Long populism (think Chavez in Louisiana). I view the Affordable Care Act as a decent attempt to repair the social safety net that was failing so many in our society (25% or so in my home state of Texas).

Globalism has not raised all boats in America; it has clearly not been a good outcome for many. This is not surprising. That's what happens when free markets rule. New conditions mean many businesses go bankrupt, some professions go away, mass migrations of people have to occur, life is messy. In Friedman's heyday, incomes rose for everyone so one could say that the downside of free markets was something to be tolerated since it worked for the majority. We haven't been able to say this for the past 30 years. The majority of Americans have not seen much if any economic benefit to free markets, and many have seen a severe downside. I wish Prof Cochrane had addressed this.

I have to also say that it is distasteful to read someone in a job protected by life time tenure not acknowledge the difficulties that free markets bring to many workers, and blithely dismiss efforts like Obamacare to repair the social safety net as essentially an evil perversion of a wonderful free society.

"The majority of Americans have not seen much if any economic benefit to free markets"

Compared to what? Have you noticed that in America poor people can be overweight? They have shoes, clothing, tv, Medicaid, some even have car and their own house.This isn't the way poor people live in most countries.

In other words, when the peasants get restless throw them a bone or two.

How naive can you get? ObamaCare was written by rich and powerful people. It was an orgy of lobbying. The year it passed, 2010, was a high water mark in D.C. lobbying. AHIP played both sides, publicly supporting it while secretly funneling $100 million to kill the loss ratio language. There were over 500 lobbying groups throwing money at it (a typical bill has 15).

Since ObamaCare enacted as an incomplete piece of legislation that left much of the subsequent regulation to bureaucrats there is now a thriving business on K Street dedicated to that activity, replete with about 30 revolving door former government officials.

A wonderfully free society? Try renouncing your citizenship and taking your wealth out of your wonderfully free society to another country. Try withdrawing $20,000 in cash from your bank account without being scrutinized by the government. Try owning one of the many blacklisted businesses that can't find a bank to do business with.

Take a look at Marx's 10 short term demands in his Manifesto. We're over halfway there.

I can't help but wonder if you even read what John wrote, or just assumed most of his words as lies and then posted this pre-written response anyways. It's really not even worth taking apart each point because John already does.

"Have you noticed that in America poor people can be overweight? They have shoes, clothing, tv, Medicaid, some even have car and their own house."

How is this different from 30 years ago? The claim was that globalization and free markets haven't helped the poor in the last 30 years, and instead have hurt them. If you look at average wages of the poor and middle class for the last 30 years that claim is demostrably true. The rich have gotten richer, the poor have gotten poorer, and the middle class has stagnated.

"The social safety net that only comprises 50%+ of govt spending isn't good enough?"

Nope. Not when you consider that the federal government is basically an insurance company with an army; and that you're only looking at total social safety net spending. Not social saftey net spending per capita.

You are right under the premise that life should be nice and easy. Give me one reason, moral, economic, political or any other that this is true. Your dirty shot that Prof. Cochran talks from the perspective of someone having “a job protected by life time tenure” and that as such he does not “acknowledge the difficulties that free markets bring to many workers the way “ misses the basic fact that Prof. Cochran did not get his tenure as a gift from anyone. Everyone, has an equal chance to master profession of his or her choosing. I know people without college education, with professions as car mechanic, cook, carpenter, truck driver who are simply good in their profession and maintain a solid middle class lifestyle, despite the recession. As someone who hired and fired employers, I can assure you that the free market is very bad for bad workers.

" I view the Affordable Care Act as a decent attempt to repair the social safety net"

When it is government action that a) increases the need for safety net via a drag on the economy, incentives against employment, costs imposed on small business, and government action that b) endangers the life of the existing safety net programs by reckless overspending, then no, there is nothing decent about the ACA "attempt". As more of the same, it is about the acquisition of power in government.

I agree with this blog post and yet--was General MacArthur wrong to institute land reforms in both Japan and the Philippines?should have general McArthur simply left most of the land in those two nations in the hands of a few families?

Development economists have long argued that land reform is a necessary pre-condition for successful economic development. Otherwise markets will not be big enough as wealth is concentrated among oligarchs. In China this was done during the time of Mao - according to instructions by Marx and Lenin .If this did not happen we would not have had a fifth of the world's population lifted out of poverty when it, very carefully and very gradually I might add (unlike the ex-Soviet Union), began to liberalise parts of its economy and take on the international capitalist system - with a lot of heavy-handed state guidance.

Americans are very ignorant when it comes to the history of these countries and they seem to look at them with rose coloured neo-liberal naivety.

Actually, the reform in China was not the result of heavy-handed state guidance. Read Ronald Coase and Ning Wang's recent book on China's transition. Liberalization happened at the edges and out of site, usually despite official policy. It was only broadened and encouraged (by some) when the success of private farm plots and private businesses was too stunningly obvious to overlook.

"when the success of private farm plots and private businesses was too stunningly obvious to overlook"

That sounds like a very neo-liberal reading of the situation. China actually followed a two steps forward one step back approach to liberation. And still does. Unlike the Soviet Union when it entered the international system in the 1990s.

They did not suddenly "see the light".

And closing the economy off itself in the first place was partly a reaction against the international capitalist system and exploitation by foreign powers and commercial interests (remember the Opium Wars). The communists had a lot of sympathy.

This is a complex area that needs to have ideology taken out. The right literature to read is the Sinology literature. Not the neo-classical economic one which is full of ideology, artificial construct, and not properly informed by historical experts - of which very few are actually in the US or even speak English.

Oh, God, inequality: Show me how various cohorts fare over the years, for the median may fall while no one's income or consumption has fallen. This is truly a non-problem.; hell, comparing points in time, it's not even a statistic worth reporting.

As for a proper welfare state, there need be no ex ante redistribution! Chew on that. :-)

Perhaps it is too simplistic but I think the economics is simple. Globalization opened up the supply of unskilled labor to the world. With free trade, this reduced the return to labor and increased the return to capital (both human and physical). (Remember the factor price equalization theorem from trade theory.) So we have seen labor in American lose while owners of capital in America win from the forces of globalization.

Now trade theory justifies all this by saying the winners can compensate the losers so everyone is better off. Society has accomplished this by creating a social safety net so that the losers from free markets are somewhat protected by unforecastable forces - I think social insurance is a very apt moniker.

Possible alternatives to dealing with the social volatility might be life time job tenure (think Japan, academia), worker expropriation of capital (Socialism, Communism), or schemes in between (highly regulated labor markets like Europe). Frankly I am surprised that there has not been a more radical labor based movement in the U.S. in response to globalization. Frankly globalization seems to have transported us back to the 1800s where it is capital versus labor. I would have expected the echos of Marx and Eugene Debs to ring louder than they do now. Perhaps to come ...

Hi Eddie - I agree that it is surprising, but maybe John is right that the poor won't revolt. If we weigh the cost of distortionary policy against the low probability of revolution, we might find that Obamacare and Dodd-Frank are very expensive insurance.

John, pity you don't stress the importance of models if we want to talk about inequality. Inequality is solvable in an Arrow-Debreu world; 2nd Welfare Theorem. However, if there is private information, even the Pareto problem breeds inequality over time -- witness Atkeson-Lucas, Ed Green, etc. This is simply a consequence of incentive problems, a law of nature if you will.

So what to do? Live with it.

There are other reasons, related to accumulation of human capital accumulation across generations (modelled by Debraj Ray and Dilip Mookherjee in particular) about why, for theoretical reasons, we should care about inequality.

But none of these issues are addressed by Piketty, Krugman, and co. Sad they can't think seriously about a serious issue.

"Inequality across countries, and thus across people around the globe, has also been shrinking dramatically even as income inequality within advanced countries has risen. One billion Chinese were rescued from totalitarian misery, and a billion Indians sort-of-rescued from British-style license-Raj socialism"

I like your blog John, even if I do not agree with it. But the above is misleading.

People outside the mainstream economics profession in development studies have been looking at this issue for decades. Particularly at places like SOAS. It is true that the emerging Asian countries moved from the periphery to the core. So therefore, on average, world per capita incomes have risen and many people lifted out of poverty.

However, the Middle East and Africa have not improved, in fact they have gone from bad to worse, since at least the 1980s . So the difference between the wealthiest and poorest countries has increased.

Another thing is you have to look at the inequality within these countries. Concentrations of capital and power in some of these countries make here make Piketty look benign. During the industrialisation process a lot of people in rural areas have been disempowered, and poverty has increased, even in the countries which now have higher per capita GNP. This is particularly a problem in India and South Asia, but it is also a serious problem in China (some 300 million people live in poverty in China, ironically a country with a low K/L ratio which sends capital abroad to high L/K countries!). South American GNP per capita growth also masks deep and actually growing socio-economic problems and arguably its growth, as usual, is not on a sound foundation.

So I would really encourage you to consult country specialists on these issues. They have the broad socio-economic-political-institutional knowledge and have been working on it for some time.

Growing global income inequality is not only an economic problem. It is international security one. Envy and grievance has played to fundamentalists.

I think you miss to address two questions. First falling marginal utility of consumption makes inequality bad, second what about Pikketty and others claim about that there is no relationship between marginal tax rate and growth(which they find in a simple regression between marginal tax rate and economic growth in the OECD)

"Lumping them all together, and attacking the symptom, “inequality,” without attacking the problems is a mistake."

It is important, however, to consider post-Keynesian arguments by Myrdal and others, and indeed Keynes himself, who explain how extreme wealth disparities and concentrations of wealth and power actually harm long term growth potential and the effective implementation of macro-economic and tax policy.

Put another way, in the real world the growth-equity tradeoff does not always exist. It is a theoretical and artificial construct.

Interesting article, but doesn't really address most important problems.Firstly, when talking about inequity in the US, rest of the world should not matter. Yes, people in the US are much better off than those in Africa or Asia, but that does not matter if we are analyzing impact of inequity on developed countries. Comparison with developed European countries or Japan may be useful.As for why inequity matters: because of the difference in taxation and social systems, US citizen has much greater incentives to escape poverty and to earn as much as possible. Yet, among developed countries, US is last in mobility between income classes. That should indicate that a) rich are genetically (through generations) better than others, especially poor, or b) that barriers exist that keep rich rich, and poor poor. Based on the mobility in Europe, b) seems far more likely.Another possible problem: when talking about the rich, those who argue against inequity problem usually present self-made man (or woman) who earns his/her money. But, 6 of 10 richest Americans have inherited their wealth. When people at the top have earned their money and position, it can be argued that any difference is based or merit, but when large part of the top class inherits money, it is almost inevitable that they would try to change the system into one that perpetuates status quo, where being rich is enough to continue being rich.Creation of rich caste has similar effect as creation of monopolies: stifling of anything that can change the order and that can threaten those at the top, so economy and society in general lose.As for taxation, in 50's and 60's top earners paid effective tax of around 50% on their total income. Today, those who earn in millions or more can pay 20% of their total income, sometimes even less, often lower total percentage than middle class. While taxes of 90% or so are reactionary and aren't useful, historical data shows that rising their total burden to 50% would not impact their incentive or will to earn more, but would enable the government to lower taxes on middle- and low-income people by a couple of percentage points, therefore spreading the prosperity (hey, one can always hope).

Great comments. "Inequality" is a humbug issue. But fighting poverty is where we can find common ground. Let's combine forces left and right to figure out how to advance the opportunities for the bottom half of income earners to accumulate wealth!

Congratulations, Mr.Cochrane, by pointing out something that seems obvious to me: liberals fail to understand that their proposed "solutions" don't lead to the (alleged) objectives, quite the opposite. They don't want to discuss the real effects of their "solutions". For example, how influential was the (now evident) inflationary monetary expansion of the Greenspan years for the median income stagnation in the last 30 years ? Everybody that works in the financial sector and has more than a few neurons know that the rich thrive in monetary ease environments, as opposed to the poor, that have to deal with inflation in the long run. When confronted, the answer is always the same: "well, that happened because we did very little of the liberal medicine, not too much..." And it keeps getting worse.

"Why is the Administration and its allies in the punditry, such as Paul Krugman and Joe Stiglitz, all a-twitter about “inequality?” Why are otherwise generally sensible institutions like the IMF, the S&P, and even the IPCC jumping on the “inequality” bandwagon? "

It's like climate change. The data is saying it's a problem and could become a huge problem. Piketty's book sold well partly because of the historical data he and colleagues collected.

The rightwing has been successful pushing its agenda these past 30 years and we see the results.

John, as a seasoned economist I thought you would take into account positional goods and their relationship to inequality here.

A large part of what determine's most people's happiness are positional goods - choice of their spouse and their friends, choice of university spots etc. The 99% don't care too much that trustfund babies, bankers or whatever other "undeserving rich" have private jets and fancy cars. They care very much that these people have access to a pool of marriageable people, to university spots, to , to a pool of chefs etc that others are unfairly "priced out of".

In a meritocratic society with equality of opportunities, if you work hard enough and contribute enough to society, you have a chance to go to Harvard or Chicago and you stand a chance to marry a high-status spouse - actor, supermodel, anything. Therefore you are incentivised to contribute to society and better yourself in order to raise your wealth and status.

In an unequal society (I don't mean high gini, I mean low intergenerational mobility in SES) there is much less incentive for meritocratic competition. Your parent's wealth will get you into Harvard, your last name will get you into the "right" parties where the people with money hang out, and the Lambo you got for your high school graduation will get you into any lady's panties. For everyone else, this is a disincentive to strive - since they are doomed to lose out from the get-go.

If monkey one sees monkey two getting a grape, the cucumber doesn't taste as good. Social media is the equivalent of a bulb illuminating inequality. It's the whole point of a selfie or Instagram. The greater inequality OR visibility, the greater the cage rattling. Most economists think that utility is absolute, failing to understand that utility is a perception, and thus relative. Just as a color can appear darker or lighter depending on the background, utility varies with context.

I think the focus on inequality is a proxy for something else. The something else, I'm guessing, is the perception that opportunity and social mobility are declining. We are returning to a version of 18th century England, where you are born into a certain class and unless you are lucky or exceptionally talented your life will not be that much different from your parents'. Perhaps this is inevitable as the rate of invention and the disruption that comes with it slows down. Big federal government magnifies the trend as an elite college pedigree and the connections that come with it have become almost a mandatory requirement for public office.

Just for the heck of it...Steven Landsburg, in his blog, had the following discussion question about three weeks ago.Just food for thought.http://www.thebigquestions.com/2014/09/11/discussion-question/

"Imagine a world where everyone is equally risk-averse, and where there are two assets available: You can hold stock in an umbrella company, or you can hold stock in a sunscreen company. Depending on the (quite unpredictable) weather, one of these stocks is sure to gain value at 100% a year while the other is sure to lose value at 95% a year, but it’s impossible to know which is which.

Given this, the smart thing to do is to hold a balanced portfolio of the two assets and earn a comfortable 5% per year. Most people in this imaginary world are smart enough to figure this out. But a small number are stupid enough to put all their eggs in one or the other basket. Half these people are quickly wiped out; the other half become super-rich.

Now we have a society in which nobody smart is especially rich, and everyone rich is especially dumb.

Question: Does this parable contribute anything useful to understanding some aspect (obviously not all aspects!) of the wealth distribution in the world we inhabit? Discuss."

The queues outside LSE to see Piketty's lecture was amazing. Not very often do we see academics arouse that kind of interest from the general public, let alone economists. Clearly a lot of people are concerned about inequities in society, even if they themselves are not directly affected. What about the key economic assumption: limited wants, limited resources (greed). Clearly that that is not alway true. People are not necessarily self-interested actors.

Time to rethink the foundations of economic theory and why it looks at human behaviour and social interaction the way it does.

"The queues outside LSE to see Piketty's lecture was amazing. "I have an alternative theory: these were all people (probably mostly students) that were too lazy to read Piketty's 600 page tome. It's much easier to see the movie than to work through a book as thick as a heavy brick.

Seems you (and the opposite) both disregard that Keynes wrote that inequality can arise from the Twin Deficits. For sure a lot of US inequality is directly tied to the trade deficit or Globalization.

You also seem to be making the mistake warned against by Pettis. You seem to "assume that except in the most obvious cases, like the impact of China on the price of steel in the US, events can only originate in the US, or perhaps in Europe, and then cause events elsewhere.

In fact this isn’t true. Because the US economy and its financial markets are so large and flexible, and because many other economies have large players – usually the state – whose behavior can drive deep domestic imbalances, it is often the US that responds to events driven abroad."

http://blog.mpettis.com/2014/09/not-with-a-bank-but-a-whimper/

If Pettis is correct and the Twin Deficits are accounting identities, then very clearly US inequality is a bad symptom.

Further, Munger says you need to invert, asking, Is there any reason to defend inequality. None appears, so why are you bothering?

i don't know enough about the subject to comment. BUT PLEASE CONTINUE WRITING ON BROADER ECONOMIC ISSUES, rather than just on macro and monetary economics. it was an interesting post. further everyone acknowledges that inequality is an important discussion. it shouldn't be hijacked by ideology. as an indian i can say that we have suffered tremendously because of our eagerness to get the government to run everything from hotels to steel mills. instead of providing primary education, basic sanitation and infrastructure the government was trying, and failing, to micro manage the economy. in the context of the US i worry about the clout of the financial services industry. their wealth has probably bought them a lot of political clout. how else does explain the fact that the US govt has bailed out banks every few years for the last 2 decades. from savings and loans to the credit crisis.

Just across the wire, "CLAYTON • The executive director of the St. Louis Economic Development Partnership said Tuesday the publicity growing out of the unrest in Ferguson has halted expansion plans by several businesses in the region."

So right there is the direct cost, to other firms, businesses, and individuals" of inequality. It is important to recall about Ferguson that it is also near ground zero in St. Louis are regards job loss due to NAFTA, entry of China into WTO, Globalization, etc.

So you have the hedge funds and other similar firms who profited by creation of inequality and then a trigger event and then job loss, further economic decay,

Whoa... huge essay and 53 comments (so far)! Too much for me to absorb everything right now, but something jumped out at me right away just from reading the first half of the essay and the first few comments:

Even before seeing Frank Restly's comment (regarding the consequences of everlasting patents") this clause caused a red flag in my mind.

I suspect that if you took away all of the tremendous government (taxpayer) subsidies to hi-tech, including those listed below (off the top of my head), you'd find that there isn't so much intrinsic (free-market) difference between computer science majors and art history majors after all.

1) All the various ways the patent system (a government system) is corrupt, aiding the hi-tech industry at the expense of everyone else

2) National Science Foundation and other government (fed and state) grants to university science programs (to engineers who then get to keep the full proceeds of the patents, rather than pay back the taxpayers)

3) The huge amount of programmers/engineers taken out of the private economy to work in the military or NSA (or CIA), driving up the pay those that remain can demand;

4) The fact tact that most people have no idea that the purpose of most hi-tech is the track their every move, physical, purchase, reading material, everything -- that what appears to be "free" software to them is actually costing them far more than if the paid for it (in the conventional sense).

5) When the hi-tech workers who promised us how much better our lives would be if we just allowed them (often using taxpayer money or extracing it, such as via monopolistic utilities, in other ways which we have little control over) computerize things, from cars to power plants, then later it turns out that they have simply made things vulnerable to criminal and terrorist attacks, they don't have to give us our money back and set things right -- no, they demand that even MORE money be give them to (allegedly) make their software secrure! (And then when it turns out not to be, they demand more money to try harder!)

(There are probably many more but I'm tired of typing right now.)

The bottom line is the vast majority of inequality is CAUSED by the government, whereas most people (especially democrats) think that government is the cure for it.

"There once was a deaf man from Nantucket..."I know it may be painful to understand that lawbreaking is punished with a sliding scale in this country, or that corruption is one of the main hindrances of economic activity (I hope you've never had to navigate bribes). After all, you stand in the august company of economists addicted to all sorts of illegal drugs.

Inequality matters, not because of the past, which you so eloquently point out, but because of the plans on the books for the future. The uberrich are a small enough population that they can afford to escape global warming by simply moving to Siberia if it gets too hot. Watch the economic activity, people are already building for widespread emigration from Boswash.

Enjoyed the article and generally your wonderings into political philosophy. But you say we should reduce the size and power of government to reduce the returns to lobbying. I agree this would be effective but not for the reasons you suggest.

Smaller government in the form of fewer regulations and lower taxes is exactly what lobbysists are calling for. So what you are really suggesting is that the government remove the need for lobbying by giving them exactly what they want -- perhaps not the wisest course of action given they certainly do not have society's best interests at heart.

I work in the hotel industry where the CEO to worker pay ratio disparity is only beaten by what prevails in the fast food industry. In New York, there is a distinct dichotomy between worker pay in unionized hotels and non-union hotels with those in the former typically earning more than double those of the latter. I suppose you may say that the union "confiscates" profits from the owners/management of the former. Curiously, the pay divide has not limited the growth of union hotels although they grow at a slower pace than the union-free hotels.

There are no studies as it is a largely private industry but the employee turnover of non-union hotels is orders of magnitude higher than those in union hotels. The training and other business costs probably exceed any "savings" these owners derive. Perhaps the confiscatory method of redistribution has some merit in this instance?

I think your argument is weak because you're bouncing between moral and economic arguments. The tone of your essay is that it's obvious that inequality isn't necessarily problem in and of itself.

Many people have a profound sense of discomfort from unequal wealth in and of itself - and obviously there's a long Christian tradition which informs our culture that wealth itself and an unwillingness for the rich to give what they have to the poor is an impediment to a good life. But obviously many people have a profound sense of discomfort for taking stuff from those whom they feel have earned it.

My strong suspicion is that if you were to go to a church congregation, read to them the gospel story on the rich young man entering heaven, and then ask your $100 or $10 blowing in the window question, the most people would say that there's a strong moral obligation for the newly rich to hand over the cash to the poor. Many church leaders (e.g. St Francis) took the lesson that there was virtue in poverty itself.

This isn't to say that you're wrong. It's to say that there's a strong tradition out there which disagrees strongly with you - which says that you're not obviously right.

To me it's pretty clear that being a citizen of a country with institutional slavery, even if I personally don't own slaves, degrades me by association. (As an aside, I just don't understand your point about Thomas Jefferson and his slaves revolting - I understand several slaves did revolt and join the loyalist ex-slaves.)

It might well be that with slavery as an institution, we would on average be more prosperous. But that doesn't justify slavery.

Perhaps - I don't know - severe economic inequality within a country, by its very existence, degrades us all, and perhaps the relatively rich have a moral obligation to assist the poor. Jesus Christ - whom many consider to be something of a moral authority - said as much. Alternatively, perhaps - I don't know - confiscatory taxation by its very existence degrades us all and perhaps government has a moral obligation not to grab the stuff of the relatively rich. Christ, when asked about this, also said something about rendering unto Caesar.

So I'm not sure the moral argument is clear one way or the other.

And you're treating it as if it is. All I really see in this article is the statement that "confiscatory taxation/government is inherently bad". Maybe government/tax is bad (and we shouldn't render unto Caesar what is Caesar's) and maybe it's not, but that doesn't really answer the question of whether inequality is a "problem" and the costs we should be willing to collectively bear to reduce it.

I think many people believe economic growth/average prosperity is good because they get personally get a bigger slice of the pie by making the pie bigger. If they don't personally get a bigger slice - i.e. prosperity increases but inequality increases so for many folk it's a wash - what's the point for these people?

That's not to say that there might not be an economic argument that inequality promotes social welfare somehow. Or maybe there's an economic argument that high marginal tax rates materially adversely impact the prosperity of average/median income people - which is what I think you're claiming. But you've not made that argument.

It almost feels like there are two very different meanings and uses of "inequality" in public conversations.

- To some "inequality" is just a catch-all term that captures their vague but vicious anger about others driving Bentleys and vacationing in Italy while they drive a Civic and vacation in South Carolina.

There is no real, rigorous, serious thinking behind the concept here. When they talk about it, you just hear the discomfort that people feel when others have more than them and they are very aware that others have more than them.

This way of talking about inequality is widespread among middle class people who actually live pretty decent lives but really would prefer to live in Beverly Hills, college students, and people who made bad decisions in their lives but will never ever admit that it might be their fault they don't own a vacation home because such thoughts cause psychological pain.

- The second form of "inequality" is inequality as a function of basic properties of the economy: technological change, globalization, etc.

I don't think the people who talk about inequality in that sense- inequality as the honest product of economic forces- necessarily see it as a problem but more the way they would see things like economic growth or productivity or labor force participation: an economic phenomenon to dissect and understand.

Obviously then, the responses to "inequality" depend greatly on what inequality is to you: an economic phenomenon or the irritating fact that others have 5 bedrooms while you only have 3.

I'm glad you posted this, because we need to start talking about this. I agree with much of what you say regarding people's motivations, but here are some key points:

1. Inequality appears to be a new topic for economists. Let's acknolwedge that and dive in and investigate before developing a policy opinion.

2. Inequalty is a suboptimal division of wealth. Given declining marginal utility to wealth, a state with any inequality is sub-optimal. (You gotta agree with that, right? That's why we like competitive markets...right?)

3. BUT, to motivate people, we need the prospect of inequality.

4. So, here we have a dlillema: we must balance an optimal division of wealth, with the prospect of inequality as a reward for a good job. In otherwords, we like equality of wealth, but inequality of income - a paradox.

5. r>g, because people only invest in companies with higher than global growth expectations. (ie: my uncle's loser start-up isn't in the S&P 500)

6. Money's ability to be used to secure a further advantage increases the value of all money, and should foster increased motivation.

7. Some new economic thinking is required to defnine the optimal balance between unequal income and equal wealth.

" I’m all for art history. Just don’t pretend that the measured economic returns to education will apply." How about you try not pretending that you've actually looked at the measured economic returns to art history? http://economix.blogs.nytimes.com/2012/01/18/what-the-top-1-of-earners-majored-in/?_php=true&_type=blogs&_php=true&_type=blogs&_r=1

I let the snarky comment in, because the table is truly intreresting. Art history is about the middle of the pack! But, let's not follow the usual NY times jump to conclusions. The fact that 5.9% of art history majors make it into the 15, does not mean that if you choose to major in art history rather than computer science, you have a 5% chance of making it to the 1%. The returns to education is not the same thing as income of majors. For example, it could well be that ne'er do well scions of wealth go in to art history, and live off their 1% inheritances, rather than your implication that there are some great $500k jobs out there in art history. How did we get on this? I actually love art history. Sorry for picking on it.

I was going to write a fairly lengthy post explaining some of the issues I take with your column, but Noah Smith and Tony Yates have done a fairly good job of addressing most of them, so I'll link to them instead; I hope you'll find them illuminating or, at least, something where we can agree to disagree.

The market competition that we are witnessing today is like an athletic race: some citizens, well fed and accessing health and education systems are far ahead; most of the others are left unjustly behind: the fair and decent minimum that can be done is to put them all on the same line of departure, giving equal opportunities at the beginning.

Inequality. Such loaded concept! May I respectfully suggest you read the excellent research on the topic by Princeton Economist Marc Fleurbaey. In particular, I recommend his 2011 Econometric Society Monograph 'A Theory of Fairness and Social Welfare,' written jointly with Francois Maniquet.

He and others work on the development of a language that people from 'the left' and from 'the right' can use and discuss the kinds of inequalities that 'deserve' correction and the extent to which they shall be corrected. The starting point is always to identify what people have a right to. In an exchange economy, for example, the individuals may have a right to consume the 'equal split' of the aggregate endowment, they may have a right to trade the equal split of the aggregate endowment, or they may have a right to consume/trade their individual endowments. The same framework for policy evaluation will lead to different measurements for inequality, and different recommended policies, depending on one's starting point in regards to 'who has the right to what.'

This topic cannot be depoliticized, but it can be studied in a systematic way when we have a disciplined language in which to make explicit our assumptions about what is and ought to be, just like in the rest of Economics.

It's not useful to read too much into the word inequality. A lot of the concern with inequality is actually concern about poverty.

Inequality has broader appeal than poverty as few people identify themselves as being part of the poor. So if a politician talks about dealing with poverty, much of what he says will fall on deaf ears. If he talks about inequality, the middle classes will listen as well.

You can argue inequality itself isn't a problem. But you can't argue poverty - and it's brother, unemployment - is not.

In America, we can talk about poor schools, drug laws, and so on as some of the structural problems contributing to our poverty right now. But that fails to explain the trend among developed nations of high or rising unemployment and stagnant wage growth.

We have to be realistic with the possibility that because we have such incredible productivity growth, we simply have an excess supply of labor, particularly in developed countries. The evidence is there, one farmer with some equipment today creates enough food for thousands. Facebook serves billions of people and has only 7 thousand employees. We are all limited in our consumption by time, not only money; we eat only a few meals per day, we have only so much free time to spend on X number of activities.

Right now, due to political and social problems we still have people dying of starvation. But when those people are finally integrated into the modern global economy and are well fed and well housed, what then? How will they earn INCOME when all that they consume is produced via such a high productivity multiplier that there is no room for them in labor market.

Of course, if supply is exceeding demand, prices should fall until a new equilibrium is reached. Except, people are not a commodity, they are differentiated by their skill. So what is happening is that those who are skilled (e.g. computer programmers) are employed and highly paid. And those who are unskilled are either eating ramen noodles in the cold, or selling drugs on the corner.

Suppose we ignore the fact that it is nigh impossible to convert the unskilled population, particularly older, unskilled population to skilled, we will still likely have an excess supply problem. The idea is that if we took only 10% of the people who are unemployed, impoverished, and/or incarcerated (globally) and trained them to be skilled in the most in-demand professions of today (programming, petroleum engineering and so on), all we may achieve would be to reduce those wages down to the median wage, and still leave 90% of the rest eating ramen without any healthcare.

I have no idea how to address this problem. Forceful income redistribution is not a credible, sustainable solution, I agree. In the far future, say 150 years from now, the entire world population may possibly be skilful enough to command an average wage, but I find it unlikely we'll have a very low unemployment rate. Can we ever reach global perfect equilibrium in the labor market? And if we can, can we do that while having the wages be sufficient to live modestly - and pay for health costs as well?

Maybe we can. I hope so. One thing is certain, capital will still accumulate wherever it is. Those that have sufficient capital working for them, don't have to work. And the more capital they have, the more capital they accumulate. Working for a median or even above median wage, even with a high savings rate, takes decades to acquire enough capital to live off of. And so we will have inequality, that is not going to change. This perhaps not in itself problem. But if the answer to the two questions above are NO, then we might be compelled to find ways to incentivize capital to flow more easily to the working population.

There is one type of government intervention that has led to greater inequality that is missing from this article: Fed policy. The latter to a great extent is explained by financial gigantism. A financial sector that accounts for 7 or 8% of GDP is clearly inefficient. The Greenspan Put was a massive subsidy to hedge funds and private equity funds. Combined with high leverage it created a massive asymmetric bet, i.e. a free option

There are valid reasons to tax the wealthy more heavily than the 95% and financial regulations based in protection from speculation. When taxes on the wealthy are too low they are far less careful in the ways they invest their money which leads to speculation. Our economic history is filled with boom and bust cycles with the two largest being the stock markets of the 1920's and the millennium era. Both of these eras have two things in common that lead to the economic disasters that followed. The lowest marginal income tax rates since WWI and either non existence or reductions in financial regulations. Both eras had marginal tax rates below 40%. The 20's had very little regulation of the financial sector and the early 2000's saw the deregulation of rules that prevented another depression for nearly 80 years. A 40% marginal tax rate based on an income devoid of loop holes on the top 5% and implementation of Dodd Frank would make a much stronger economy.

"If you believe cronyism is the problem, why is the first item on your agenda not to repeal the Dodd Frank act and Obamacare, surely two of the biggest invitations to cronyism of our lifetimes?"

Regarding repealing Obamacare, wasn't US health care extremely problematic before the law was even passed? Health spending in the US has been rising above that of Europe since the 1908's and the government subsidizing nearly half of all health spending. Government health research spending barely makes up any of this, so I would personally say that leaving the system as it is for the case research hardly makes a reason for a broken system to remain. After the relative success of health systems with more state control (at least compared to the mess in the US), shouldn't that be a logical alternative to our old system.

Maybe repealing Obamacare would be a good idea simply because of the high costs of its inspiration: the Swiss system. But, doesn't the low cost of Canada's single payer system, or even France's system that, while being high compared to other countries, would involve a serious reduction in health expenditure in the US.

There are other obvious reasons for health reform in the United States mostly regarding our rather appalling infant mortality rate and comparatively low life expectancy.

I have been thinking about this post for a while now. The most basic economic problem is determining "values". In a market, relative prices capture these values and coordinate the economic activity by equating marginal costs and benefits. If prices capture the economic value of activities, it is not far fetched to imagine that income/wealth, at least partially, captures (correlated with) the economic-social values of individuals. (From neuroscience, we have some idea that a good part of a person identity and self-value comes from his/her social connections/status.) In an economy with high level of income-wealth inequality, the system is giving (imperfect) signals to a lot of its members that they are worthless: 1 percent of the population is equal in worth to another 40%, for example. A "Bill Gates" has a value equal to millions of low wage workers.

Does this intuitive argument make any sense to you? Most people feel intuitively that something is wrong with high inequality .... I tried to make it a little more economic :)

"the gap between the top 1% and the next 9% has increased... Why should the concerns of these people over index so dramatically in the public consciousness? It is because these are exactly the people – that is, those who are in the top 10% but not in the top 1% of earners – who write our newspapers, run the civil service, occupy professorships at our universities, and ultimately those who go into politics. Their intuition – no more than a gut feeling, cchanneled by a mixture of confirmation bias and hubris – is post-hoc rationalised into an ‘urgent’ issue that must be addressed by ‘society’."

Thanks to a few abusers I am now moderating comments. I welcome thoughtful disagreement. I will block comments with insulting or abusive language. I'm also blocking totally inane comments. Try to make some sense. I am much more likely to allow critical comments if you have the honesty and courage to use your real name.

About Me and This Blog

This is a blog of news, views, and commentary, from a humorous free-market point of view. After one too many rants at the dinner table, my kids called me "the grumpy economist," and hence this blog and its title.
In real life I'm a Senior Fellow of the Hoover Institution at Stanford. I was formerly a professor at the University of Chicago Booth School of Business. I'm also an adjunct scholar of the Cato Institute. I'm not really grumpy by the way!